Why Romney's wrong on Dodd-Frank

When financial giant JPMorgan Chase recently revealed that it had lost far more than $2 billion in a credit derivatives trade gone wrong, the news sent a clear message: Opponents of financial reform are wrong. Without the Dodd-Frank Act and the global reforms being led by the United States, the financial sector would go back to its old ways, eventually putting taxpayers and the economy at grave risk of harm.

Yet for the presumed GOP nominee Mitt Romney, the news sent a very different message. He repeated his call to repeal Dodd-Frank, though it made the system stronger, and though JPMorgan’s revelations demonstrated the need for robust rules.

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Romney and many Republican lawmakers seem intent on going back to the financial casino that led to the worst economic crisis in 80 years. The financial industry has spent far more than $100 million trying to roll back Wall Street reform. Romney, meanwhile, has been clear about what he wanted to get rid of — a comprehensive financial reform package that passed Congress and was signed by the president. Yet he makes only the vaguest of promises about what he might do instead.

Romney’s reaction is the equivalent of putting out a small fire in your house, then deciding that the lesson is you need to stuff your house with matches, throw out your fire extinguisher and cancel your fire insurance. And doing all this after the house nearly burned to the ground less than four years ago.

The system of rules under which the financial industry operated in the lead-up to the financial crisis was broken. Financial institutions took on too much risk with too little capital. Financial companies could escape meaningful supervision by calling themselves investment banks or insurance conglomerates rather than commercial banks, and all institutions could move assets and liabilities off the balance sheet and out of regulatory purview in the shadow banking system.

Derivatives were traded in the dark; conflicts of interest were rife; securitizations and synthetic products hid real risks; and there was no way to wind down a major firm like Lehman Brothers without causing widespread harm. Consumers and investors lacked adequate protections, which too often meant that the financial industry could take advantage of them.

These flaws blew up the financial system, crushed the economy and cost millions of Americans their jobs. They wiped out families’ savings and put homes at risk. These flaws lined the pockets of Wall Street bankers while making taxpayers the fall guy for their failures. This is what we would get back if we followed Romney’s advice and repealed Dodd-Frank.